The linked story demonstrates how the FDIC works. Small banks fail all the time, usually because of bad management. In this case, banks are probably failing because unemployed consumers and small businesses, which have seen revenues drop as the result of the recession, are unable to repay their loans. Some of the loans were good, however—that is what the story is talking about when it says that assets were purchased by another bank.
Look at the size of the banks that failed on Friday: $242.9 million, $120.2 million, $335.8 million, and $32 million. These are not the multi-billion dollar banks that the government bailed out as “too big to fail.”
Look at how these banks failures were treated—other banks purchased their deposits and assets. When another bank purchases deposits, the full amount of the deposit is purchased, even though FDIC only insures deposits up to a certain amount. In other words, no depositor lost any money as the result of these bank failures. Good loans and investments are the “assets” that were purchased by other banks. The FDIC keeps the bad loans, but doesn’t just write them off. They go after collateral and judgments against the borrower in order to recover as much money as possible for the FDIC fund. Stockholders and the FDIC took the loss, and the FDIC will try to recover some of its losses. The shareholder is out of luck.
Look at how the FDIC is funded. The story says that as of 12/31/2009 they had a deficit of $20.9 billion, caused by bank failures. The reaction of FDIC was to force BANKS to pay premiums of $45 billion in order to replenish their fund. In other words, the banking industry is paying for the costs of these bank failures, not the U.S. Treasury.
When a mechanism similar to FDIC was taken out of the banking reform legislation, I shook my head in disgust. That tells me that congress is not serious about fixing the “too big to fail” problem with big banks. Small banks pay into an insurance fund that protects depositors, but there is no such protection for small investors who invest their money with investment firms. And the only way to save the economy when a failing bank is “too big to fail” is to have the government bail out the bank.
Homework:
http://finance.yahoo.com/news/FDIC-shuts-banks-in-Fla-Minn-apf-2475780035.html?x=0&sec=topStories&pos=main&asset=&ccode
Look at the size of the banks that failed on Friday: $242.9 million, $120.2 million, $335.8 million, and $32 million. These are not the multi-billion dollar banks that the government bailed out as “too big to fail.”
Look at how these banks failures were treated—other banks purchased their deposits and assets. When another bank purchases deposits, the full amount of the deposit is purchased, even though FDIC only insures deposits up to a certain amount. In other words, no depositor lost any money as the result of these bank failures. Good loans and investments are the “assets” that were purchased by other banks. The FDIC keeps the bad loans, but doesn’t just write them off. They go after collateral and judgments against the borrower in order to recover as much money as possible for the FDIC fund. Stockholders and the FDIC took the loss, and the FDIC will try to recover some of its losses. The shareholder is out of luck.
Look at how the FDIC is funded. The story says that as of 12/31/2009 they had a deficit of $20.9 billion, caused by bank failures. The reaction of FDIC was to force BANKS to pay premiums of $45 billion in order to replenish their fund. In other words, the banking industry is paying for the costs of these bank failures, not the U.S. Treasury.
When a mechanism similar to FDIC was taken out of the banking reform legislation, I shook my head in disgust. That tells me that congress is not serious about fixing the “too big to fail” problem with big banks. Small banks pay into an insurance fund that protects depositors, but there is no such protection for small investors who invest their money with investment firms. And the only way to save the economy when a failing bank is “too big to fail” is to have the government bail out the bank.
Homework:
http://finance.yahoo.com/news/FDIC-shuts-banks-in-Fla-Minn-apf-2475780035.html?x=0&sec=topStories&pos=main&asset=&ccode
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